Be prepared well in advance… Selling?
By John Mahoney, Mahoneys
For a number of years when authoring Tips for Selling Management Rights for Resort News
I have begun with comments about how the quality of a prospective buyer had become an important factor in any management rights sale. That is still the case, more so than ever before.
Before you actually list the business for sale there is so much that can, and should be done, to make the sale as smooth as possible. The selection of the buyer is however absolutely critical, and it is one of the first questions I ask a seller when I learn of a potential sale contract.
Qualified buyer
In past years some bodies corporate failed to properly investigate an incoming manager’s qualifications and experience, they accepted anyone put forward and then found they have a poorly performing manager. Regrett ably that became a common occurrence. As a consequence of this, bodies corporate today, quite understandably, are demanding that proposed new managers are properly qualified and experienced, or if not, that they have undergone appropriate training, both theoretical and practical.
Body corporate managers who bear the brunt of dealing with a poorly performing onsite manager, are also encouraging this approach.
There used to be a misconception that a body corporate could not refuse to consent to an assignment unless the proposed new manager was a criminal or a bankrupt. That is, and always has been, far from the case. A body corporate is entitled to be satisfied that a proposed new manager has the qualifications, experience, and financial capacity to perform all of the duties under the management rights agreements. You should therefore properly vet any proposed buyer to make sure that the buyer will be acceptable to the committee. If the buyer is a new entrant to management
rights, there are various training and educational opportunities available in the marketplace that you should insist the prospective buyer undertakes. The ARAMA induction course is, in my view, a must for such buyers. In addition, new entrants should, for their own benefi t, source and undergo training in regulatory compliance and if necessary some handson practical training.
If not, there is a very real possibility of experiencing problems with the assignment process, huge legal fees from the body corporate’s lawyer and every likelihood of the assignment being rejected.
If the buyer has held management rights previously ask to see references from those bodies corporate or committee members. If such references cannot be provided, be prepared for your body corporate to refuse consent to the assignment.
Letting appointments
Any proposed seller should check the lett ing appointments. POA Forms 6 are automatically assignable but not all PAMD Forms 20a. Ideally, you have by now had all Forms 20a replaced with new Forms 6 but if not, and you are relying on these, for them to be assignable (depending on the version used), they should have the assignment section ticked and initialled, or you will have to obtain the consent of all owners to an assignment to the buyer.
Almost without exception, buyers are insisting that at sett lement the purchase price be reduced for noncompliant appointments. We have seen purchase prices heavily discounted, and some contracts terminated because the sellers did not want to, or were not able to, produce compliant appointments.
Management rights agreements
Next, check your body corporate agreements. Locate copies of caretaking and lett ing agreement deeds of assignment, deeds of variation and the like. If my firm has acted for you, you would have all these documents in the indexed binder or on a USB stick we provide to our clients after the sett lement of their purchase.
Get the real estate agent you have selected to scan electronically, and/or take photocopies of these to give to prospective buyers. You should also give your solicitor copies of these documents for two reasons.
First, your solicitor can check that everything is in order - for example, that options have been properly exercised. Second, if the buyer’s solicitor or financier raises questions about the agreements during the transaction, your solicitor will be able to deal with the matter quickly and efficiently.
managers have failed in their attempts to extend the term. Because of our involvement in the legislative changes we have been called upon on a number of occasions to remedy ineffective additional options.
Term of agreements
The term remaining on your agreements is critical. Unless you have long-term agreements with your body corporate, you should be thinking about how the term of your agreements will impact a future sale as early as the time you buy.
You must also consider that most (if not all) buyers looking at a complex in the standard module will (these days) want close to the full 10 years to run on agreements when they purchase. With complexes in the accommodation module, most buyers will be looking for at least 15 years, depending of course on the amount being borrowed, but many
buyers and their financiers want as close to 25 years as possible.
The transfer fee rules will not penalise you just because you sell within two years of getting a new agreement or adding a new option. It is only if you sell within one or two years of becoming manager that the transfer fee applies: three percent of the business sale price in year one, or two percent in year two.
Adding a new option to an existing agreement is technically prescriptive. Apart from getting a new agreement, this is the only way that the term can safely be extended. Because of these technical requirements, many lawyers and body corporate
Termination clause in agreements
Much has been written about the Gallery Vie QCAT decision and the changes that financiers want made to the termination provisions in management rights agreements to deal with the problem created by that decision.
If you have not already done so, you should have your lawyer check your agreements to make sure they are Gallery Vie compliant. If they are not, you really should take steps to amend the agreements to deal with the issue.
The changes can be done in a simple and straightforward way but do require an AGM or an EGM, as it is increasingly rare that a financier or a body corporate committee will accept this being done as part of the assignment. Most managers are dealing with the matter at the same time as they are topping up their agreements.
Financial figures
You will need up-to-date financial figures. Take the time and spend the money to get up-to-date figures for sale purposes from an accountant with management rights expertise. So many sellers rely upon outdated financial figures or on figures that are not really prepared for sale purposes.
I have seen a number of sellers grossly underestimate their net profit and find that the buyer’s accountant has verified a net profit well in excess of that shown in the contract. With multipliers of around five and above, a difference of only $5000 will cost you more than $25,000. That’s enough to cover a fair component of the agent’s commission.
Make sure you get the most up-to-date figures you can. The buyer’s bank will want figures no older than a month or two.
Make sure your body corporate salary has been updated to
take into account the latest CPI increases or any market review that might be permitted under your agreement.
Get expert help
Above all, use the experts.
You might think that you don’t need a specialist accountant to put together your net profit figures. As any honest accountant will tell you, it is a very specialised area. As a general rule, figures prepared according to normal accounting standards will show a net profit lower than the way in which it is calculated for sale contract purposes. Only a specialist accountant will be able to produce accurate ‘for sale’ figures.
You might also be tempted to use a local or suburban lawyer because they offer a cheaper rate. Although, as a general rule, there are fewer legal issues when you are selling than when you are buying, I have seen so many sellers get themselves into trouble because they have tried to save money by using a lawyer who does no t specialise in this area.
You need someone who understands management rights to be able to deal with any issues raised by the buyer or the buyer’s solicitors. Often, we are able to salvage a sale transaction because of our expertise and ability to convince other solicitors of our view of the legal position.
Perceived savings on commission might encourage you to market your business yourself rather than use an agent and sometimes you might succeed. But there are downsides. A good agent will help guide a buyer through the purchase process and often keep together a sale that might otherwise fall apart. I have seen that happen on more than one occasion.
A good agent should also pre-qualify a buyer to ensure that your time is not wasted by unqualified buyers or buyers who will not get finance approval. On the other hand, if you are able to find a buyer yourself, then an experienced lawyer will be able to handle contract preparation and negotiation.
Plan to maximise your gain and minimise pain Selling Management Rights:
By Lel Parnis, Holmans
Selling management rights can be a challenging prospect, but careful planning and engaging the right industry professionals to guide you through the process is key to a successful sale transaction.
Ideally, planning for sale should start the day you sett le on your purchase. Reviewing issues encountered during your purchase process and taking steps to resolve them will make your own sale process easier and may increase the value of your business.
Review your letting appointments
Ensuring your agreements are all up to date, completed, signed, and include the correct licensee details is a relatively
The less tax payable on the capital gain you make selling, the more cash is available for your next venture
simple step often overlooked before listing management rights for sale. All management charges should be authorised in writing, and ideally, a current, signed, or initialled schedule of fees and charges should be filed for every unit in the lett ing pool to ensure no issues arise during the financial verification on sale.
Key issues, easily avoided, include:
• Agreements not signed and dated by both parties.
• Incorrect licensee and signatories.
• Incorrect format of agreements (Form 6 vs. PAMDA 20a, current version, etc.),
• Missing charges (cancellation fees, new charges, increased rates) from addenda/ fee schedules.
• Current schedule of charges not included with owner agreements.
Keeping your lett ing appointments, including addenda and schedules of fees and charges, organised — ideally in soft copy along with other owner correspondence — reduces the risk of issues arising during the financial and legal due diligence process on sale.
Net profit for sale
The sale price of your management rights will be based upon a multiple of the adjusted net profi t for a recent 12-month period — the more recent, the better. The better your bookkeeping records, the smoother your financial verification process will be.
It’s not rocket science, but the preparation of a profi t and loss statement for sale purposes is not entirely intuitive and is subject to adjustments specific to the management rights industry. Against the best advice from industry professionals, some
management rights owners continue to prepare their own profi t and loss statements when they go to sell, particularly in long-term lett ing.
While this approach may save in professional fees, it is likely to increase the likelihood of a sale contract falling over or a dramatically reduced sale price due to common errors when the buyer’s accountant reviews the figures during their due diligence process.
Common, simple errors in poorly prepared sale figures include:
• Not accounting for revenue on an accrual basis.
• Failing to ensure 12 months of trading is reported.
• Making inappropriate adjustments not aligned with industry practice.
In particular, any adjustments for labour should be carefully considered. We often hear vendors pushing to exclude labour costs on the basis that a “two-person team could do it all themselves” because there were no wages in the figures when they bought. While this may be true and may have been an accepted adjustment historically, it is increasingly important that any adjustments are reasonable in the current market and can stand up to scrutiny by industry professionals.
Minimising tax on capital gains
The less tax payable on the capital gain you make selling, the more cash is available for your next venture — be it a new business or funding your retirement.
Ensuring you have the most appropriate business structure from the outset will maximise your opportunity to access the small business concessions when you sell. Even if the business structure is not the most appropriate from the outset, you may still be able to minimise any capital gains tax (CGT) exposure with appropriate planning in the year of sale.
The gross capital gain — being the sale price less purchase and sale costs — may be reduced by the 50 percent general CGT discount if the asset is owned for at least 12 months, depending on your structure. But the greatest opportunity for minimising tax on sale is by accessing the small business CGT concessions.
The small business CGT concessions include:
• The active asset 50 percent reduction.
• An active asset rollover.
• A retirement exemption.
• A 15-year exemption.
The basic eligibility criteria for access to the small business concessions require taxpayers to either have aggregate turnover of less than $2 million or net assets under $6 million at the time of the CGT event.
When considering whether to operate your management rights business through a company rather than a family trust, you should be aware of the potential implications from a tax perspective upon sale. In a company structure, you will not be able to access the 50 percent general discount, and the application of the active asset concession is less effective. That is not to say a company structure is never the right vehicle for a management rights investment.
Where your management rights business is operated through a discretionary trust, it is important to plan ahead when anticipating a capital gain to ensure any CGT discounts or concessions are available.
If appropriate distributions from the trust are not made in the year the capital gain is realised, it may not be possible to apply various concessions otherwise applicable.
Finally, if applying the rollover concession and payments aren’t made within the correct timeframe or the correct approved forms are not completed, the Tax Office may not allow the concession, which could result in an unforeseen tax bill long after the sale is finalised.
If managed correctly, technically a two-person team could
sell their management rights business, make a gross capital gain of $4 million on the sale of goodwill, and pay no tax at all. Tax saved on the sale of your small business is easy money — all that’s required is to invest in good advice from the beginning.
The moral of the story
Choose your advisors carefully. Saving a few dollars today in professional fees may be lost many times over in the future when you come to prepare your business for sale and pay tax on your capital gain.
